ESTea #14 23/07/21
Spotlight on: Eurizon Sustainable Multiasset
Essentially, the Italians do everything better than the rest of the world. It’s hard to admit - but it’s true. Born from the finest Italian Banking pedigree (Intesa Sanpaolo) - Eurizon is a prima donna of asset managers, complete with a virtuoso sustainable manifesto.
The new Sustainable Multiasset Fund is part of the contemporary wave of ESG funds throughout Europe established in response to investor demand, and increased regulatory pressure.
The fund has global exposure, including emerging market, and the team are investing in equities and equity based instruments. However, The Green and Sustainable Finance group at Eurizon aren’t simply looking for attractive equity opportunities that pass through an ESG filter, instead they’re following a similar approach to GIM (tea passim) and looking for firms with ESG metrics that will tangibly affect their value positively or negatively.
This approach from Eurizon is essential and a change from what we’ve seen from ye olde ESG funds.
Previously, funds would take their existing strategies and overlay an ‘ESG screen’ meaning that they simply wouldn’t invest in certain funds or instruments because of ethical concerns. The model says to do x, but x is investing in a tobacco company so “no grazie”.
Any effective strategy which is artificially constrained by a simple ESG screen will always result in performance loss.
To show this, you can imagine a choice between two options (two equities), and the model must pick between investing in either. One is environmentally friendly (it sells machines for making rainforests) and the other isn’t (this one sells fashionable coats which emit carbon).
The model should choose which one to invest in, with and without the ESG screen.
If Rainforest Machine INC is the choice which performs better, then both the model and the ESG-screened model should both select that equity. But, if Carbon Coat GMBH is the option which perform better (in the unknown future) - then only the regular model will make the right choice.
Taken over a long period of time, this means that any effective model will perform better without an ESG screen.
Eurizon’s approach avoids this problem - instead looking for ESG metrics that will affect the price directly - something which is often poorly priced in by the market. And, this approach has paid off so far with the fund up 7% since its inception in May 2021.
Instead of just using a screen, they’re looking to invest in companies whose ESG credentials are under-valued by the market in terms of future performance - or vice versa, their poor ESG credentials are a risk which isn’t properly recognised.
The Sustainable Multiasset Fund is one of a handful run by Eurozin and sits underneath their impressive Sustainable Policy. This sustainable policy is very good but their addition of the Italian Stewardship Principles is a welcome cortorno.
These principles aren’t specific to Eurizon, but instead they were written by the Assogestioni. Whilst “Assogestioni” sounds like an after-dinner drink, it’s actually the very effective, thoughtful and progressive Italian Association of Asset Managers. These guidelines, known simply as ‘the principles’ set out requirements for proxy voting on equity companies and on investment guidelines. Eurizon’s adoption is important vote of confidence in their approach to equity ownership and voting.
As more information comes out about the multiasset fund over the next 12 months, the ESTea will certainly check in again. They’ve got a strong technical team and have chosen not to hire in new team-members from ESG backgrounds, instead moving existing talent across to the ESG funds. Only time will tell how this works and whether it’s successful.